We downgrade our recommendation for NET Servicos de Comunicacao SA (NETC) to Neutral, which means the stock will perform mostly in line with the broader market. The stock price has moved up nearly 117% in the last one year and is currently trading at the high-end of its 52-week price range. According to our assessment, the current valuation of NET Servicos calls for very limited room for above market gain.
NET Servicos is the largest integrated cable MSO in Brazil and one of the leading pay-TV operator in Latin America, base upon number of subscribers. Since 2005, the company has posted impressive operating results, including continued growth in its subscriber base, increasing average revenue per user, strong growth in broadband and voice services, better cash flow generation, and continued growth in revenues. However, we believe these positives are already reflected in the current valuation leaving little room for above market gain.
In Brazil, media companies are suffering from audience fragmentation and limited near-term reinvestment opportunities. Consumers have access to an unprecedented selection of independent media outlets resulting in audience dilution for most traditional media services. To retain share, large media companies are forced to reinvest in additional media outlets. However, growth is limited by government regulations on media ownership. Attractive reinvestment opportunities, nevertheless, remain a challenge.
We are encouraged by the performance and the outlook for the pay-TV service and the continued growth of the broadband segment. We also believe that the company is in a unique position to benefit from the growing demand for cheap telecommunication products, new product launches and reliable broadband devices in Brazil. However, we also believe these positive factors are already reflected in the current valuation leaving little room for above market gain.
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